Fun With Numbers – The BMO Nesbitt Burns Edition

As you may have noticed, if you read the blog frequently: I like to crunch numbers, me. Recently, because I’ve had a business math class at Niagara College, there has been less of this kind of thing, but I’m here to tell you that I was spurred into action whilst looking at a report on the North American beer industry that was released last week by BMO Nesbitt Burns. It suggests that there are two things that large brewers in the North American theatre can do to improve their situations:

1)The report suggests that North America is currently classified as a mature market. A mature market is a market that has entered into a state of equilibrium. You might remember a while back that I wrote about seeming detente between the large brewers. They each basically have a brand to compete with an equivalent brand that the other one has. The market shares held by AB InBev and MolsonCoors don’t actually fluctuate very much on a year over year basis. According to the Euromonitor International report that I’m looking at from 2010, AB InBev has about 42% of the Canadian market by volume and MolsonCoors has something like 37%. Between them, they account for about 80% of the total market. When you discount, Sapporo and imports, the craft beer segment might make up 10% of the total Canadian market, although I suspect that to be generous.

I feel like the large brewers could break into the craft market if they really wanted to. MolsonCoors has Creemore and Granville Island, but aside from wider distribution, those seem to be being pretty much left alone to do their thing. This is probably a good call. I have little doubt that each of AB InBev and MolsonCoors will pick up some additional craft labels at some point in the next couple of years. Personally, I’d go for ones that are already of sufficient volume to be distributed consistently on a national basis. There aren’t that many.

It’s not a good long term game. I suspect that the thing that keeps them out of the craft market is that the profit margins are not equal. It’s good to remember that these are huge multinational companies and that they’re beholden to their shareholders.

One of the reasons that we’re in this situation is that the economic precept of the last half century has been the assumption of consistent and inevitable growth. Corporations are expected to grow annually in order to be seen as a good investment. What this means is essentially this: If your name is Bob Johnson and you own Johnson’s Wiener Factory and everybody eats your hot dogs already and you’re the only game in the town, you have the significant likelihood of being downgraded as an investment because you’ve got no ability to grow the market. Stability isn’t enough. You need to find a way to cram more Johnson’s Wieners into the overcrowded gullets of your consumers. Just, y’know, jam them in there. Or maybe come up with a line of mustards. Or a new marketing campaign: “Johnson’s Wieners: What a Mouthful!”

The model only works if guaranteed growth of the economy is possible. Unfortunately, North America is a mature market. Basically, everyone has the share of the pie that they’re going to get. The overall size of the market will grow slowly on its own, but essentially, barring a global financial apocalypse, the ability to manufacture further growth is not very cost effective on a large scale.

Canadians drink something like 2.384 billion litres of beer a year, or about 69.5 litres per capita. Launching a new craft brand would take R&D, marketing research, resources, labour, materials, and you’d be clawing for maybe 0.25% of the market if you were a total success at it. About 6 million litres. Not chump change, exactly, but potentially not worth it. It’s hard to predict reception to a product like that, as well. It might be worth it if you bought an established brand whose performance you could predict, but it’s not going to result in the year over year gains you need to keep shareholders happy. It’s neat for the portfolio and results in some pretty darn good beer being made in the case of something like Creemore Kellerbier.

2)Before I go on, I should point out that I’m culling data from the internet, which is always a little dicey. It should be basically accurate if not completely so. Also, I’m working from litres per capita figures that do not reflect the current year, as there’s no data for 2011 yet.

When you talk about emerging markets, that essentially means markets in which there is the possibility of establishing yourself and experiencing a lot of growth. I’ve seen Russia thrown around, but it’s a market about half the size of the states and shrinking demographically. Plus, they consume about 70 litres of beer per capita already. Not a huge amount of room for growth.

Make no mistake. The prize is China.

China currently has a population of about 1.34 billion people. As of 2010, they drink 32.1 liters of beer per capita. That means approximately 41,730,000,00 litres of beer annually. That is a market that is 17.5 times larger than Canada’s and about 1.75 times larger than the U.S.

Canada has a population growth of about 1% annually. It’s been that way since about 1995. At that rate, over the next 20 years, you’re looking at a growth from 34 million people to approximately 42.3 million people. The amount of beer that we drink per capita doesn’t change all that much, so let’s keep it at the figure I had of 69.5 litres per person. If that holds steady, you’re looking at growth at a factor of 1.246. We’ll be drinking nearly 3 billion litres of beer annually.

Interestingly, the U.S. Expands in that time by a factor of about 1.244, with an extrapolated population growth of 0.87% reported during the summer of 2011. Over the next twenty years, their market should expand to 31,171,200,000 litres from current consumption, assuming per capita consumption stays constant at 81.6 litres.

China is not like that. Beer consumption in China has increased every year for the last ten years. In 2000, it was 17.5 litres per capita. It is currently something like 32.1 litres per capita. They have a population growth of 0.47%, but because it’s a much larger population, you’re looking at something like 1.48 billion people by 2032. Let’s assume, for the sake of argument, that their consumption will eventually top out somewhere around 70 litres per capita, since that’s a respectable global average. 1.48 billion people drinking 70 litres of beer per capita is about 103 billion litres of beer a year. Growth factor: 2.468

At that time that would be just under half of the beer consumed in the world, and that’s without even considering beer for export.

AB InBev already has 11.1% of the market share and are brewing 5 billion litres annually in China. Just their stake in the Chinese beer market is more than twice the size of the entire Canadian market. MolsonCoors are expanding there as well, and although AB InBev has a big head start, Coors Light seems to be pretty popular.

Think of the possibilities. They don’t need to create brands. They can import ones that already exist. The demand will be such that marketing can be kept to a minimum. Imagine the position you’d be in as a large multinational company if you controlled 33% of this market by the time it reached maturity. You would have grown with it, dictating the direction of the market. It would be three times bigger than Canada and the U.S. combined by the year 2032.

I feel like maybe the BMO Nesbitt Burns report should have highlighted that more. In the long run,1% of the North American market is chump change, so a long, entrenched fight for the craft market doesn’t actually make any sense. This is especially true when you realize that a pint of Carlsberg sells for $12.50 Canadian in parts of Shanghai.